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The
Truth Behind Points and Shopping for the Best Mortgage Rates
by
Allan B. Beraquit
- January 2005
The
Truth Behind POINTS
Points run in increments of .125’s (1/8's).
On a $100,000
loan, .125 of a point is $125 and 1 point is $1,000. Points are not always
a bad thing. In fact, points can be very good. It is not as complicated as
one would think.
First, it
is necessary to
understand the
relationship between points and your proposed lender or broker,
and then
understand the relationship between points and the holding period of your
investment (How long do you intend to keep the home as a residence or for
investment purposes?).
In a
nut shell:
Secondary sets pricing for Mortgage Banks, Mortgage Lenders,
Correspondents, and Brokers. Secondary is where all entities sell their
mortgages in bulk, in the form of fixed term or mortgage backed securities. Some mortgage
lenders originate loans through their retail branches, but most originate
loans through correspondents and mortgage brokers. When their loan pools
are large enough, they are sold on the
open or
secondary markets. Some of the larger buyers on
the secondary market are FNMA, FHLMC, as well as many insurance and
investment banking firms. These securities are bought and sold on a daily
basis, similar to how stocks are bought & sold on Wall Street.
Now
let's talk about pricing on a retail level.
First
and foremost, your Loan Officer who works for a bank, mortgage lender or
mortgage broker, originates mortgage loans for the public on a "Retail"
level.
The
retail office they represent will always have a set revenue amount needed
per transaction. On a standard $100,000 loan, $2,000 to $3,000 in revenue
is common for conventional type loans, $2,500 to $5,000 on sub prime loans,
sometimes more on private or hard money loans, and even more on very time
consuming transactions, such as commercial loans.
There are always exceptions to this rule.
Certain Loan Officers will award discounts for repeat clients, while at the
same time, may charge higher fees for “Situational” type loans such as
Bailouts, Hard-Money and High Leverage Financing. In addition, larger loans
usually equate to larger fees and smaller loans equate to smaller total
fees. Ps. note on larger loans; while it is customary for a loan officer to
earn more on a larger loan, there reaches a point of reason. While earning
a total of
2% is
fair on a $200,000 transaction, is it really necessary on a 1,500,000
transaction, considering the work is only slightly more difficult?
Let’s
use an example. You are dealing with a Bank, Mortgage Lender or Mortgage
Broker who has a branch revenue requirement of $2,000. A par rate (Buy
rate) for a 30yr conventional fixed rate mortgage (FNMA) may be 5.250%
through the secondary department or wholesale department (Wholesale is who
brokers and correspondents fund their mortgages through) of a Mortgage
Lender or Bank.
The
Mortgage Lender offers their retail branch and/or brokers the following
pricing (Pricing changes daily in accordance with the market)
5.250% PAR
5.375% -100.500 Rebate
5.500% -101.000 Rebate
5.625% -101.500 Rebate
5.750% - 102.000% Rebate
5.875% - 102.500% Rebate
6.000% - 102.875% Rebate
6.125% - 103.250% Rebate
By
offering a 5.250% rate, the originating branch of the bank, mortgage lender,
or mortgage broker (Table funds loans for wholesale departments of mortgage
lenders), will not receive any compensation for originating your loan. That will
not
work, as there are no Charitable Mortgage Lenders, Banks or Mortgage Brokers
in the industry. If you want that 5.250% rate, you will have to pay 2
points (2% of the loan amount) in order for the originating branch to meet their $2,000
branch revenue requirement.
Examples:
Your
Loan Officer may offer you a rate 5.750% with no points. With the
aforementioned pricing, they will receive 2 points ($2,000) from secondary
or through the wholesale department of the mortgage lender.
Your
Loan Officer may offer you a rate of 5.500%, which includes a fee of 1% in
points. The full $2,000 will still be met. 1% ($1,000) will come from
secondary and the other 1% or $1,000 will come from you at closing in the
form of points.
That’s how the relationship works. $2,000 may seem a bit high to the
average consumer, but if you understood the amount or work involved in
funding loans and the costs associated with operating a mortgage lending branch
or a mortgage brokerage company, $2,000 gross per transaction is on the low
side.
Note: Buyers generally pay 3% to 6 % commissions (Points) to Realtors for
simply showing a home and writing a contract. Relative to such, $2,000 in
gross revenue is certainly on the low side, especially when you consider the
average investment of staff and time it takes to fund a mortgage loan.
Conventional Loans always pay yield spread premiums enabling the public
to procure these types of loans with no points.
Sub Prime
and 100% Investment Loans pay very little yield spread premium
(Some don’t pay any at all), forcing originating mortgage lending branches
and mortgage brokers to charge more points in order to meet their revenue
guidelines.
Hard Money Lenders and Private Investors
do not pay any yield-spread premium. In fact, many will even charge a point
or two just to fund the loan. This is why you see even more points charged
by originating mortgage lending branches and mortgage brokers for these
types of transactions.
Now let’s talk
about the relationship between your holding period and the amount of points
you should pay. Using the above scenario;
If you
borrowed a
$100,000.00, a no point loan will give you a rate of 5.750%.
The
payment is $583.57. If you elected to pay 2 discount points or ($2,000) to
buy down the rate to 5.250%, you would then have a payment of $552.20.
That’s a difference of approx. $31 per month. You paid $2,000 to buy down
your rate by ˝ of a percent. Sound good? Maybe….
Divide $2,000
(Buy down points) by $31.00 and you get a breakeven period of 64.51 months.
Recommendations:
- Someone
looking to buy and flip (Sell immediately), paying discount points is a bad
choice.
- Someone
looking to buy, hold and sell within 2 - 5yrs (Avg. first time home buyer),
paying discount points are again a bad choice.
- Someone
looking to
buy, hold, and sell
after 64.51 months – pay the discount points to buy down the
rate, as after the 64th month, the monthly savings is pure net profit to
you.
That’s how points work. Points are not a bad thing, provided they are
understood and applied correctly to one’s Real Estate Buying Objectives.
Mortgage Lender Branch or Mortgage Broker Revenue
Just
because a bank, mortgage lender or mortgage broker branch brings in $2,000
in revenue, does not mean the Loan Officer earns $2,000 in commission. In
general, 50% will go to the branch or broker to meet overhead, leaving your
Loan Officer to earn a modest $1,000.
Banks
and Mortgage Lenders generally have minimum Branch Requirements per loan.
$2,000 - $3,000 is average for conventional loans. Mortgage Brokers &
Correspondents can extend more flexibility and may, should they choose to,
only generate $1,500 or even $1,000 gross revenue on a loan, for a really
good client, friends, family, etc.
Some
newbie Loan Officers may also work for $1,000 or $1,500 ($500 to $750 in
commissions) because they need the business. I will say this; you will
always get what you pay for.
Real
Estate Investors
Don’t
nickel and dime a good Loan Officer as he or she will make you or save you
tens of thousands of dollars over the course of a relationship. Let him or
her make what they generally make and the service will come ten fold.
HELOCS: Don’t think you are doing your loan officer any favors by
originating a $30,000 HELOC (Home Equity Line of Credit) for you. Home
Equity Line of Credit Loans are issued to our Real Estate Investor Clients
as an added service.
In
order for a branch to meet their $2,000 requirement, the Loan Officer will
have to charge you about 6.5 points to do your loan, as most HELOCS do not
provide for yield spread premiums (Commissions from secondary or
wholesale).
In my
opinion,
that's a rip off for a $30,000 HELOC. So what ends
up happening, your
Loan Officer does all of that work and charges a modest 1-2 points in order
to remain competitive. In other words, his branch will gross $300 - $600
for originating your HELOC loan, and he/she will earn approximately $150 - $300 in
commissions.
As you can see
by the above examples, there is very little money to be made in HELOCs. The
originating industry funds HELOCs for clients as an added service, with the
hopes that they are given the opportunity to fund the next $100,000 or
$500,000 purchase or refinance loan for their HELOC clients.
Shopping For the Best Deal
Next
time you are shopping for a mortgage; don't ask the questions
everybody in the industry dreads:
• What is
your rate?
• How
Many Points are you charging?
• Can you
fax me a Good Faith Estimate?
Those
are signs of a Green Horn or Newbie Real Estate Investor who bought the
wrong "How to get rich by investing in Real Estate" book.
Find
someone you feel totally comfortable with. Someone who knows the game and
can help you structure your deals as if they've done it a thousand times.
Someone who has worked with numerous Real Estate Investors, and can provide
you insight in credit, income & asset structuring. Someone who can analyze
your Real Estate Investment objectives and structure your transaction with
your tenth transaction in mind (Very IMPORTANT). Someone who can guide you
in making sound investment decisions. Someone who is honest enough to tell
you what they need to make per loan and honest enough to tell you that the
property you are looking at stinks and not to buy it. Find someone who will
work with your interests in mind. Someone looking to establish and grow a
strong Lender - Borrower Relationship with you!
That
someone must have access to unlimited mortgage lenders, so they can obtain
the most competitive wholesale pricing.
Banks
and pure mortgage lenders are out of the question. Find any Bank or Lender
and most "Multi-Capacity Lenders/Brokers will beat their conventional quote
by at least .250%
Small
brokerage houses generally do not have access to optimum pricing due to
their small size and/or minimal volume. Certain mortgage lenders will not
even waste their time with small mortgage
brokerage
firms.
Larger Multi-Capacity Correspondent Lenders and Brokerage Houses who have
been in the business for long periods of time with track records of funding
large volume through their wholesalers will generally receive additional
production bonuses. If you are dealing with an honest Loan Officer,
they will pass those savings on to you.
In concept,
it’s like buying a TV from Wal-Mart vs. your local mom and pop shop
appliance store. You will most always get a better deal at Wal-Mart for the
same TV. Wal-Mart will have a larger selection, and because they buy TVs
direct from the manufacturers in large quantities, they
in turn, sell them to the public for less and still generate profit.
Find yourself
a good Mortgage Lending Officer with the ability to Broker. This optimizes
your ability to procure the best possible pricing and have access to an
unlimited pool of lending products and lenders, just in case you or the
people buying your homes and/or cashing out your Lease Options may not
qualify for Conventional/FNMA Loan Programs.
With that
said, the questions you should ask are:
a. Can
you fax a resume to me?
b. Can
you fax references as well?
c. Can you
spend some time with
me and
discuss
Real Estate Investing and how you can help my business
grow?
d. Based on
how many and the type of homes I wish to purchase per year and my credit &
income profile, how much are you willing to work for per loan?
If you want to
be a successful Real Estate Investor,
a dependable source of funds is absolutely necessary.
A source you can call, provide particulars to, and
trust to
get the deal
done, so you can spend
your valuable
time looking
for the next good buy and not worrying about your loan funding.
Here at
Progressive we
take it several steps further. In addition to being a full fledged Lender,
Banker and Broker with all of the products the entire industry has to offer;
we are extremely versed in Real Estate Investing and Financial Planning.
Our objective is to help you identify a market for yourself and give you the
insight on how to exploit that market to the fullest degree, by offering
what we know about Investing, Financial Planning, Leveraging and its overall
relationship to the lending industry. Our products, which are offered at
very competitive pricing, will merely act as tools to help you achieve your
personal and business financial goals.
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